Here is an alternative economic strategy for South Africa to double GDP and cut unemployment to 12% by 2030

President Cyril Ramaphosa will on Thursday, 15 October 2020, presented a ‘widely consulted’ South African Economic Reconstruction and Recovery Plan to a Joint Hybrid Sitting of Parliament.

Analysts and economists have called for urgent structural economic reforms to get the economy up and running again. Statistics published at the end of September showed that 2.2 million people lost their jobs last quarter.

By the extended definition, which includes those people who have actively given up looking for work, the real unemployment rate in South Africa climbed from 39.7% to 42% over the period.

The country’s economy suffered a significant contraction during April, May and June, when under widespread lockdown to restrict the spread of Covid-19. Data showed that gross domestic product (GDP) fell by just over 16% between the first and second quarters of 2020, giving an annualised growth rate of ‑51%.

And the World Bank predicts a weak recovery for a nation in deep recession following four consecutive quarters of economic decline. It expects a 7.2% contraction come year end, and followed by a mere 2.6% expansion in 2021.

Prior to Ramaphosa’s  presentation on Thursday, a group of academics proposed an alternative economic strategy for South Africa.

Dr Nthabiseng Moleko and Prof Mark Swilling see GDP doubling in 10 years, 10 million people moving out of poverty, and unemployment cut by two-thirds to 12% by 2030, under their proposed strategy.

Prof Mark Swilling is a distinguished professor of sustainable development at Stellenbosch University, and Dr Nthabiseng Moleko is a development economist and senior lecturer: Managerial Economics and Statistics at theUniversity of Stellenbosch Business School (USB).

The paper, they said, seeks to ensure that there is better alignment between South Africa’s economic policy and the constitutional commitment to heal the divisions of the past and establish a society based on social justice and correcting structural economic inefficiencies and inequalities.

South Africa’s response to the Covid-19 crisis, the academics said, is an opportunity to reconfigure, restructure and rebuild the economy by departing from more than two decades of post-apartheid economic policy which has seen lacklustre growth and not achieved significant gains in economic equality.

Together, they have published a paper, titled “New Wine into New Wine Skin: An Alternative Economic Strategy for South Africa’s Economic Reconstruction”.

A different approach

Continuing on the current path, relying on “mainstream economic thinking and use of existing micro-economic solutions” is unlikely to deliver different outcomes in the future, while the proposed alternative strategies are geared to diversifying the economy to support inclusive economic transformation, labour-intensive growth and a globally competitive and sustainable economy, the academics said.

To overcome the stagnation of the economy, which has been deepened by Covid-19 and the national lockdown, the South African government must boldly look to drafting new economic policies that can deliver on the vision set out in the National Development Plan (NDP).

The alternative economic framework is driven by strategic interventions in industrial policy with a target of doubling the contribution of manufacturing to GDP, prioritising labour-absorbing sectors, and boosting domestic food production and rural development.

The framework envisages shifting policy on investment and mobilising domestic capital, fiscal policy aggressively targeted at higher economic growth, building state capacity for innovation and governance, and re-shaping empowerment policies to achieve real growth through redistribution.

The alternative economic framework proposes a new model of the state, “enabled by enhanced coordination and supported by domestic capital mobilisation with a reduced reliance on external capital markets and financial flows”.

The key aspects of the paper are summarised below:

Set up a council

On industrialisation as a key growth driver, the report recommends the establishment of an Industrial Council to enable coherent planning across the various institutions falling under the Department of Trade, Industry and Economic Development.

Although under a single umbrella, agencies such as the Industrial Development Corporation, Small Enterprise Finance Agency and the National Empowerment Fund use different incentives and policy instruments, leading to fragmented and ineffective programmes.

Shifting sectors

The alternative framework sets a target of doubling the contribution of manufacturing to GDP by shifting from primary sector activities to high-value-added goods and processing of agricultural products.

A phased approach would initially develop highly labour-intensive sectors, adopting a more capital-intensive growth path over the longer term and transitioning to technology-based industrial development.

“Arguing that South Africa’s unemployment challenges are due to ineffective interventions rather than lack of funding, labour-absorbing strategies are proposed to address the lack of unskilled and semi-skilled jobs and the mismatch between skills production and labour demand,” the report said.

Focus on specific industries

It said that sectors with potential to absorb large numbers of unemployed people – including agro-processing, plastics, metals, construction machinery and the transition to renewable energy – should be prioritised, with education and skills programmes aligned to their needs.

Sectors that do not hold the potential to absorb much more labour – chemicals, machinery and equipment, and agricultural and transport machinery, for example – but that still play a key role in value chains, should be supported through employment-generation conditions in state procurement programmes, it said.

Alternative rural development and domestic food production strategies are needed to address high levels of economic inactivity, unemployment, food insecurity and dependence on social grants in rural areas, and to grow the share of black farmers in the agricultural sector.

“Alternative strategies would link the rural farming economy to upstream and downstream value chains, and improve access to markets, including by providing state-subsidised credit to small-scale farmers,” it said.

Make money work

The report said that enabling debt instruments that will grow industrial and productive capacity and generate positive social outcomes are recommended, along with imposing a tax on “idle capital” to encourage corporations to reinvest rather than stockpiling capital.

Strategic fiscal measures should link government expenditure to economic output and the impact on poverty, inequality and unemployment, while fiscal stimulus packages would revive supply side sectors, boost industry and drive competitiveness, the document states.

Advancing economic recovery can be achieved through inflation targeting, quantitative monetary easing and lower interest rates, rather than by increasing public expenditure and tax cuts.

Fiscal stimulus should focus on sectors such as energy and those that can generate greatest socio-economic impacts over both short- and long-term, achieving poverty alleviation alongside growth, the report said.

“Non-debt fiscal stimulus interventions are also recommended, including redirecting the investments of the PIC and development finance institutions, zero-rating certain items, increasing grants and restructuring the tax system.”

Address governance and transformation

Government officials should be supported and rewarded for innovative risk-taking, and be able to work through partnerships to achieve their mandates.

State-led transformation interventions such as Broad-Based Black Economic Empowerment (B-BBEE) have failed to achieve equitable participation in the economy, and the alternative framework proposes a number of strategies for economic growth through redistribution, the report said.

An empowerment model should be driven by the Preferential Procurement Policy Framework Act to encourage and provide fiscal support to rural and township enterprises to participate in national and provincial procurement programmes.

Land transfers for agricultural and manufacturing use should be finalised in order to support the emergence of a new class of farmers and industrialists, while amendments to the Competition Act are recommended for fast-tracking to limit oligopolies and open access for locally-owned retailers in small towns, villages and townships.

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